RioCan Pushes South

07/28/2010 11:54 am EST


Benj Gallander

President, Contra the Heard

Canada’s largest REIT is on the make in the US to feed its hefty 7% yield, write Benj Gallander and Ben Stadelmann in Contra the Heard.

If the “can” in RioCan (Toronto: REI-UN) stands for Canada, will “Rio” soon refer to the Rio Grande? Could be, as the largest REIT in Canada looks to beef up its US holdings.

The first cross-border foray was a strategic alliance last fall with Cedar Shopping Centers. Cedar owns 124 properties in the Northeast, but was overleveraged and squeezed by the credit crisis. RioCan bought directly into Cedar with a $40-million private placement, as well as picking up an 80% stake in seven shopping malls for $176 million.

Now it’s the Lone Star state that has [chief executive officer] Ed Sonshine’s attention. In May, RioCan signed a deal to acquire an 80% interest in eight shopping centers for $138 million. As is the case with Cedar, the American minority partner will continue to manage the properties, in this case located in Austin, Dallas/Fort Worth, and Houston.

Sonshine is eager to make more acquisitions in the US, where there are more opportunities than in Canada. His long-term view is that the potential exists for rent increases down the road, which will outstrip those closer to home, because the development pipeline is nearly empty.

But in the shorter term, he is also acutely aware of the fragile nature of the recovery, and by insisting on buying high-quality properties with low vacancy rates, he avoids parts of the country—-like Arizona, California, and Florida—that are the most distressed.

RioCan has taken a lot of heat for maintaining its distribution through the downturn. Standard & Poor’s revised its rating outlook to negative due to insufficient coverage. Other analysts have opined that management’s commitment to shareholders is unrealistic.

It sure looked that way in 2009, but improved first-quarter results suggest the company is turning the corner. Funds from operations were $86.4 million, up from $70.6 million for the corresponding quarter last year. In a conference call, Sonshine stated, “We are approaching this year and next eagerly, looking to material growth in our [funds from operations] from our existing operations, new acquisitions, and our ongoing development program.

“We have actually highlighted that program in our quarterly press release, perhaps in a more forceful manner than usual, just to remind our stakeholders that a significant amount of new income will be coming on stream in the next 18 months.”

Part of that expected improvement in profitability will be tied to RioCan’s ability to tap the current low-interest-rate environment. The company can write mortgages against property for about 5%, while retiring higher-interest debt. By negotiating a $300-million bank credit line with a non-callable three-year term, RioCan needs to keep less cash on hand. As Sonshine crowed, “We’ll earn effectively 7% on that money simply with repayment of debt.” Gotta love the jingle of that tune!

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